The Turkish lira sank to a fresh record low Monday as incumbent Recep Tayyip Erdogan secured his victory in the 2023 presidential election, extending his rule into a third decade in power, reported CNBC.com. At 12:00 noon Istanbul time TL is losing 0.48% and 0.78% against USD and Euro, respectively.
The currency briefly touched 20.0608 against the greenback at around 11 a.m. Monday morning local time, surpassing a low seen last week.
“We have a pretty pessimistic outlook on the Turkish Lira as a result of Erdogan retaining office after the election,” Wells Fargo’s Emerging Markets Economist and FX Strategist Brendan McKenna told CNBC’s “Squawk Box Asia.”
McKenna forecasts that the lira will reach a new record low of 23 against the dollar by end of the second quarter, and then 25 as early as next year. It has lost some 77% of its value against the dollar over the last five years. He expects Turkey’s unorthodox monetary and economic policy frameworks to remain in place going forward.
Turkey’s monetary policy places an emphasis on the pursuit of growth and export competition rather than taming inflation, and Erdogan endorses the unconventional view that raising interest rates increases inflation.
“The current set up is just not sustainable,” said BlueBay Asset Management’s Senior EM Sovereign Strategist Timothy Ash via email.
“With limited FX reserves and massively negative real interest rates the pressure on the lira is heavy,” Ash continued.
Istanbul’s main index, the Turkey ISE National 100 gained roughly 2% in its first hour of trade.
Credit default swaps, which measure the cost of insuring exposure to Turkish debt, also spiked. Five-year CDS were trading at around 664.18 basis points, marking a 20% climb from the 550 basis point level prior to the run-offs, according to Refinitiv data, though they were off the recent high of 700 basis points.
These developments reflect market participants’ belief that orthodox policies, which were promised by the political opposition, were the only way to get the Turkish economy out of a potential crisis, said Selva Demiralp, a professor of economics at Koç University.
Meanwhile, MarketVector’s CEO Steven Schoenfeld wrote in an e-mail. “If the Lira continues to plunge and inflation surges again due to the policy of inappropriately-low interest rates, we could see a repeat of the ‘flight to safety’ allocation to Turkish equities by local investors which moved the market sharply higher in 2022.”
‘Bleak economic outlook’ ahead
“It’s a very bleak economic and markets outlook for Turkey,” Wells Fargo’s McKenna added.
He noted that the “one silver lining” in the whole scenario could be the Turkish central bank’s ability to secure currency reserve swap lines with countries in the Middle East and China.
“If they can continue to draw on those lines and possibly extend and enhance those reserve currency lines, maybe there’s some support in the central bank FX intervention,” he added.
Can Erdogan embrace traditional economics?
Erdogan promised a bold new economic initiative in his traditional balcony speech, with Turkish media reports of former economy czar Mehmet Simsek being re-appointed once again. There are also unsubstantiated social media talk of former Central Bank governor Naci Agbal being appointed to an economic portfolio in the new Cabinet.
In contrast to international Turkey watchers, faith among Turkish experts about orthodox economic policy orientation is very low. This view is reinforced by Erdogan’s emphasis on keeping interest rates low in the a.m. balcony speech.
“I don’t think Erdogan recognizes how close Turkey is skirting to a full-blown financial crisis. As Turkey approaches such calamity, his response could be seeking IMF aid, but more likely is the scenario where he resorts to asset confiscation, discriminatory and punitive taxation, ending all hints of dissent of his policies and non-transparent deals with Russia, Azerbaijan and Gulf monarchies to delay the inevitable” wrote our columnist an editor-in-chief Atilla Yesilada in a note to his clients.
Erdogan is not expected to announce his new team before the certification of final results by High Election Council, which is expected on 1 June. The new Grand Assembly starts its work on 3 June with oath-taking, when Erdogan will also take the oath of the office. The new Cabinet should be sworn in by 4 June.
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